A Discussion On Price & Narrative

Because we have established that valuation requires narrative context, and that intrinsic value functions as a rhetorical device rather than an objective anchor, the causal relationship between price and narrative comes into question. There is a common adage that holds “price leads and narrative follows”, observing that market participants construct stories after prices move, adjusting explanations to match whatever market movements took place. This observation is astute to a degree, as media pundits, investors, and traders alike do chase price action, flipping from bullish to bearish narratives as markets oscillate. But this phenomenon, however real, conflates two distinct things: the post-hoc rationalization that follows price, and the sentiment that generates price in the first place.

The price leads view treats price as primary and narrative as secondary, serving as explanation after the fact. But this framing obscures that narratives can and do exist without price through political expectations, economic forecasts, and macro theses, which all circulate as belief structures before any trade occurs. Price, however, cannot exist without narrative since every transaction requires a buyer who believes the asset is worth acquiring at the stated price and a seller who thinks it is worth selling. The specific beliefs about a transaction, and whether to buy or sell at a given price, do not exist prior to engaging with market conditions. These are all shaped by investor expectations and assumptions.

A competing view, associated with narrative economics, inverts the sequence and claims narrative leads, and price follows, but “fundamentals” eventually catch up.¹ This framing shares the same flaw albeit inverted, treating narrative as a temporary distortion and fundamentals as the corrective anchor, thereby resurrecting the myth of intrinsic value this essay has already deconstructed. The claim that fundamentals eventually “catch up” rests on the premise that an objective reality exists independent of market sentiment and can intervene to restore order. But fundamentals are simply data points that observers model, discount, and frame according to their own expectations.² In both views, “price leads” and “narrative leads”, there is an assumption that a separation in narrative and price is possible, with one preceding the other; but this differentiation is illusory.

Here it becomes important to draw a distinction between sentiment and narrative to highlight that sentiment is what generates narrative. Narrative gives sentiment its structure and general communicability, allowing individual conviction to become a shared story. Narrative is the vehicle through which individual conviction scales to the collective, but the initiating force remains individual sentiment. Any narrative without this underlying conviction is just a story; it only becomes market relevant when sentiment animates it. Similarly to how narratives can and do exist without price, sentiment can exist without a fully articulated narrative; but narrative cannot exist without the sentiment that produces it.

Furthermore, what precisely qualifies as a “narrative”? Is it a social media meme, a macro thesis, a community slogan, a valuation story, or perhaps a political expectation? How is it measured or falsified? Without a clear operational meaning, “narrative” becomes universal in scope, where whatever price does is called narrative-driven, and whatever price does later is classified as fundamentals catching up. This betrays an inability to distinguish between narrative-as-cause and fundamentals-as-correction when discussing price. The result is a theory that cannot be disproven because it lacks specificity. Yet theories earn their usefulness by making testable predictions and risking falsification; if a theory explains everything, it explains nothing.³

The core fallacy lies in an imagined division between short-term narrative and long-term reality, as though markets oscillate between speculating on fiction today and retreating to objectivity tomorrow. Both short- and long-term investors who rely on DCF or other inputs as a means of mitigating sentiment are effectively applying filters that are constructs of prior narratives. This highlights that a market is not a pendulum of activity; but is a continuum of adversarial auctions, all wagering on potential outcomes. These wagers require judgment, and since fundamentals cannot function as self-interpreting truths, historical assumptions become the default, leading us to treat the past as prologue.

The claim that fundamentals eventually match narrative is a clever way of rebranding 20/20 hindsight as discipline, functioning more as a metaphor than a mechanism. In forward-looking markets, no ideal reality will ever arrive to correct the narrative present; there will only be ongoing revision of probabilities as new information challenges old assumptions. Price does not follow narrative and then yield to fundamentals; price registers the current settlement of beliefs, and valuation provides the language for contesting or defending that settlement. The difference between the two is clear: price is a market fact, and value is a market narrative. As such, we should not be focused on the causal relationship between narrative and price but with how sentiment, incentives, and reasoning conspire to make one set of assumptions tradable and another untenable.

Footnotes

1. Shiller, Robert J. 2019. Narrative Economics: How Stories Go Viral and Drive Major Economic Events. Princeton University Press. ↩

2. Flynn, Joel P., and Karthik A. Sastry. 2024. “The Macroeconomics of Narratives.” National Bureau of Economic Research (NBER) No. w32602. https://economics.mit.edu/sites/default/files/inline-files/Narratives_website.pdf. ↩

3. Olszewski, Wojciech, and Alvaro Sandroni. 2011. “Falsifiability.” American Economic Review 101 (2): 788-818. https://doi.org/10.1257/aer.101.2.788. ↩